Barron's Cover: Stem Cells' Powerful Promise
By KOPIN TAN
DANIEL KERNER COULD SPEAK in complete sentences and sing nursery rhymes by the time he was two. So his parents were baffled when his speech began to deteriorate. Then his motor skills started to falter until one day, when he was 4, Daniel had to crawl off the school bus that dropped him off at his suburban Southern California home.
Doctors diagnosed the boy with Batten disease, a rare degenerative disorder in which the brain stops producing enzymes needed to clear cellular waste that accumulates and grows toxic. Afflicted children become blind, bedridden and demented; very few live to their teens.
So on Nov. 14, 2006, Daniel became the first volunteer in a risky clinical procedure. Over eight hours at a Portland, Ore., hospital, doctors drilled a hole in his skull and injected his brain with neural stem cells collected and purified by a small biotechnology company called StemCells. Doctors hoped these cells would grow into healthy, enzyme-producing tissue.
It's too soon to call the surgery a success. But within a month, Daniel's parents noticed he made more eye contact. Then Daniel said "Dad" for the first time in two years.
"He was just a kid waiting to die, and he was given a gift of life," says his father, Marcus Kerner, an assistant U.S. attorney and lieutenant colonel in the Air Force Reserve. Today, "Daniel is getting stronger steadily and very excited when he tries to talk." For his seventh birthday earlier this year, and with help from an instructor and special equipment, Daniel went skiing at Mammoth Mountain, a resort in the eastern part of his home state.
Minor miracles like Daniel's are why stem cells inspire so much hope -- and hype. Both will intensify this year as money pours in from states and private donors, as the political climate becomes more supportive and as small biotech companies -- many of them long on promise yet short on profit -- seek to capitalize on this wave of optimism. Investors would be well advised to pay close attention, particularly to companies whose products support the research effort, but to proceed carefully -- and with patience -- as the science develops.
Already, some companies are lining up clinical trials this year to test how stem cells -- primal cells that can grow quickly into different tissues -- will affect patients suffering from cancer, heart disease and spinal-cord injury. But the scope extends beyond life-threatening ailments; the San Diego company Cytori Therapeutics (ticker: CYTX), for example, is testing 19 patients in Japan to see how stem cells extracted from fat can reconstruct breast tissue after mastectomies.
"We don't even know what the potential scope or limits are," says Arnold Kriegstein, director of the Institute for Regenerative Medicine at the University of California (San Francisco) and a founding director of Columbia University's Neural Stem Cell Center. "But we're at a transformative moment, and stem cells could change what we know of medicine."
SO WHAT GIVES stem cells their biological potency? While the human body has many types of cells -- bone, blood, nerve and muscle, among others -- stem cells are versatile primary units that can divide, differentiate and grow into other specialized cells. These include adult stem cells, found in bone marrow, blood or other body parts, as well as embryonic stem cells, which come from human embryos and, as such, carry more ethical baggage.
Human embryonic stem cells were first extracted in 1998 (by researchers at the University of Wisconsin), so the science is still young. Embryonic stem cells -- culled, for example, from unused embryos at in vitro fertilization clinics -- are controversial, since their extraction destroys the embryo. But scientists also believe they hold greater potential for self renewal and can grow into more complex organs.
It is a measure of how much is unknown that scientists differ widely when asked the time it would take to develop a marketable human embryonic stem-cell treatment, with answers ranging from three to 30 years. Among the obstacles: transplanted embryonic stem cells in animal experiments that sprouted unwanted hair, teeth and tumors -- a sign that scientists haven't fully figured out how to coax them to grow only into specific cells.
In comparison, more limited therapies using adult stem cells are expected to reach the market sooner. In fact, some of these have already produced encouraging signs in early human trials designed to verify the treatments' safety, although not yet their effectiveness.
Researchers from Osiris Therapeutics (OSIR) recently injected bone-marrow-derived stem cells intravenously into 53 patients who had suffered heart attacks. Compared with those given a placebo, treated patients were four times less likely to suffer irregular heartbeats, and the "ejection fraction" -- a measure of the amount of blood a heart efficiently pumps -- improved. No one died. Next up: efficacy trials that involve hundreds or possibly thousands of patients.
In a separate, independent test in Brazil, 13 of 15 Type 1 diabetes patients who were treated with stem cells from their own blood were able to stop using insulin to maintain normal blood-sugar levels.
IF WALL STREET BELIEVES in following the money, much of its own private cash has gone to stem cells lately (see Wealthy Individuals, States Fund What Bush Won't). And private-equity money could well follow as the science gathers momentum. "There's a whole developing field of socially responsible investing, and I think it hasn't yet looked at critically necessary medicine," says Robert Klein, the real-estate developer who was the driving force behind California's decision to fund stem-cell research. Within three years, more money should come from venture-capital investors, pensions with a social mandate, and the growing pool of socially responsible funds, Klein says.
Stem cells have already drawn the attention of large corporations. Genzyme's (GENZ) stance, for one, is fairly typical of big biotech's. The Cambridge, Mass., company is no stranger to cell-based treatment and therapy, having explored the field for more than a decade. "Cell and gene therapy in the last 20 years has tended to over-promise and under-deliver," says John McPherson, head of its biologic research. Still, Genzyme says it continues to study the field, and this includes watching for small promising companies to buy.
Others are moving in selectively, a sign they see future commercial potential. Merck (MRK) has provided funding in exchange for shares -- with warrants to buy more -- in Geron (GERN), a Menlo Park, Calif., biotech company that works with embryonic stem cells. Boston Scientific (BSX), which makes the nation's top-selling drug-coated heart stent, has a joint venture with Osiris to develop its stem-cell treatment for heart disease.
At the same time, symbiotic deals have sprouted between small stem-cell companies with emerging technology and large device makers with manufacturing muscle. General Electric's (GE) health-care unit has acquired exclusive global rights to distribute a device from ThermoGenesis (KOOL) that extracts and stores stem cells, while Japanese camera and equipment maker Olympus (7733.Japan) has a deal with Cytori to manufacture a machine Cytori designed to harvest stem cells from fat tissues.
This surge of interest from deeper-pocketed players is not lost on the small biotech companies struggling to turn their developing science into commercial payoffs. In fact, most companies are desperate to milk any goodwill -- one reason why investing in stem-cell companies can be treacherous.
For a start, most stem-cell companies have only a thin pipeline of one or two products -- usually based on hard-to-handicap science. Few are profitable. Almost all are burning through wads of cash and only too willing to use any means within reach to raise money needed to stay afloat. Advanced Cell Technology (ACTC) never seems to have taken a step too small to trumpet in a press release. (Recent example: The company's ability to rescue vision in blind rats was noted in Scientific American's March issue.)
Also, a major breakthrough, when it does arrive, might not come from a company whose shares currently trade.
No question, the payoff for picking right can be big. The $23 billion drug-discovery company Celgene (CELG) was once a small-cap stock before the Food and Drug Administration approved its Thalomid drug. As a result, speculation in stem-cell stocks is rife. Anticipation of imminent breakthroughs sent Geron shares above 75 in 2000; today they trade around 7. Few of these stocks attract the kind of long-term institutional investors that lend a stabilizing influence, and most jump and slide on mere mentions or rebuttals in medical journals, which makes them susceptible to academia's ego-driven swipes and snipes.
SO WHERE SHOULD AN INVESTOR INTERESTED in a relatively pure stem-cell play begin?
From the outside, the squat, nondescript building that houses StemCells in Palo Alto, Calif., looks just like a college lab. A trickling brook out front strives for a bucolic touch. There was no receptionist on a recent afternoon when a reporter came calling; the CFO himself answered the door.
The company with the industry's most coveted ticker symbol -- STEM -- is run like a lab; three-quarters of its 46 employees are in research. Its current Phase 1 trial for Batten disease ultimately will involve six patients, and was the first FDA-approved test using human neural stem cells (extracted, in this case, from aborted fetuses). So far, both Daniel Kerner and a second child who was treated are doing fine.
But because Batten disease affects just one in about 250,000, the treatment has no blockbuster potential -- one reason the shares have been dormant. CFO Rodney Young stresses, however, that the effort has "substantial impact" on the study of degenerative neural disorders. StemCells is also planning a clinical trial this year for liver disease.
With StemCells' shares trading at about 2.50, one can argue that downside risk is capped. Still, there's little need to rush in, either, since results for its Batten trial aren't expected until late next year.
In comparison, Baltimore-based Osiris Therapeutics is further along the commercial track. It already has on the market Osteocel, a bone-regeneration treatment that drummed up $8.3 million in revenue last year. But the rising cost of its growing number of clinical tests also pushed its 2006 loss up 125% to $45 million.
Early results from safety trials for Provacel, its heart-disease treatment, and Prochymal, for treating Crohn's and acute graft-versus-host disease, have been promising. Both use similar stem cells but are branded differently because of a pact with Boston Scientific over the heart treatment. Under the deal, Boston Scientific will market and distribute the Provacel treatment Osiris developed, with revenue split evenly.
While this opens a crucial door for Osiris to the heart market, its 35-year-old CEO, Charles Randal Mills, tells Barron's he isn't pursuing more of these cost-defraying partnerships. "We have the financial backing to do it on our own, and the company is more valuable whole," he says.
The size of the market for heart treatment bodes well for Osiris. But much of that potential already may be factored into its stock price. William Tanner, a bullish analyst at the brokerage firm Leerink Swann, reckons Osiris shares are worth 19 to 22 , based on projected 2011 per-share earnings of $1.77, discounted at 35%, and a price-earnings multiple of between 35 and 40. The shares, which jumped above 22 after the late-March announcement of encouraging Provacel heart-disease results, fell below 15 recently.
Tables: Who's Who in Stem Cells | Betting on BiotechIf there's a face from stem-cell research that's made for prime time, it's the one belonging to Hans Keirstead. The strikingly telegenic neurobiologist from U.C. (Irvine) -- he rides a Ducati -- has already been tucked into Calvin Klein and shot for Men's Vogue, which hailed him for "fast approaching a cure for paralysis."
What Keirstead has actually done is harvest stem cells from embryos that can help regenerate neurons damaged in spinal-cord injury. When these are injected into lab rats with damaged spines, the rodents end up walking again after about nine weeks.
Keirstead is one of the researchers sponsored by Geron, which has invested more than $100 million in stem-cell research since 1995. Based on his research, Geron is applying to the FDA to begin clinical trials later this year on people with spinal-cord injuries -- potentially the first government-approved test using human embryonic stem cells. That would be a key milestone for Geron (which has two other clinical trials for treating cancers). But the market has assigned a generous "technology value" of $326 million to its pipeline, obtained by subtracting its $214 million in cash from its market capitalization of $540 million. "We believe that the market has already priced in pipeline progression," says Needham analyst Mark Monane, who expects the stock to trade "in line with the overall market until further clinical efficacy data" emerge.
IF SMALL STEM-CELL STOCKS can't bloom until the science begins to flower, businesses that support and facilitate stem-cell research might reach fruition sooner.
An example of enabling technology comes from ThermoGenesis, which makes devices and related disposable items for personalized cell therapy, including one of the more advanced machines for harvesting stem cells from blood and storing them.
"Until recently, stem cells were harvested and stored using decades-old technology created for bull-sperm storage, basically vats of liquid nitrogen," says Steve Brozak, president of the independent biotech research and brokerage firm WBB Securities. Demand for ThermoGenesis' Auto-Xpress and BioArchive machines, Brozak says, should grow with stem cells' popularity.
Already, GE has secured the rights to distribute these machines, and some analysts say ThermoGenesis ultimately could be a target for GE or medical-equipment giants like Biomet (BMET). Recent manufacturing glitches haven't helped the company. But the backlog of orders augurs well for future sales -- as does the rising trend among affluent parents who are banking their babies' umbilical-cord blood as some sort of future medical insurance.
"Stem-cell therapy represents one of the most under-penetrated market opportunities in health care," and ThermoGenesis is "well positioned to garner share in this market," notes Maxim Group analyst Michael Tu, who in March initiated coverage of the stock with a target of 5. Shares were at 3.23 recently.
Brozak also likes the prospects for Cytori. The company already has pulled off the rare feat of finding a use for fat tissue. It has also developed a "Celution System" machine, which extracts stem cells from fat, with at least 18 first-generation machines already in the market.
"Because you can get a good dosage from fat tissue and get it quickly -- usually within an hour -- you don't need to go through the process of growing them in a Petri dish" or sending donor cells for cultivation in a lab, says Cytori President Marc Hedrick.
Cytori's method of extracting stem cells from fat that are then used to treat the patient was approved in Europe. The company hopes to apply for U.S. approval later this year. Japan's Olympus has invested $44 million in the past two years for the right to make these machines, with manufacturing profits to be split evenly. Cytori expects to book revenue from its next-generation devices in 2008.
An ill-advised attempt to package stem-cell treatment with liposuction earned Cytori some derision, even though there's some logic in linking the battles against cellulite and disease. Cytori, after all, got its start seven years ago when a biotech exec planning to have her body fat hoovered asked about its storage (she had heard that fat was rich in stem cells). Hedrick, 44, who trained as a reconstructive surgeon, still sees the nexus between liposuction and stem-cell treatment as a potential "growth area in the future." But for now, he says, Cytori is focused on its Celution-based stem-cell treatment. The company, which is burning through $2 million a month, is also beginning clinical trials in Europe to test how stem cells extracted from fat affect heart-disease patients.
To hear Hedrick tell it, "you can almost give away the machines" -- each of which has a cost estimated in low five figures -- since lucrative profit margins will be driven by the sale of consumable accessory products. Inquiries are coming from hospitals and from doctors and plastic surgeons in private practice.
THE KERNERS -- DANIEL'S PARENTS -- suffered two miscarriages some years ago. So Marcus Kerner says he's heartened to learn the source of the stem cells that have helped Daniel -- "to know that something good has come out of a dead fetus." He understands how divisive stem-cell research can be, even when the cells don't come from embryos, but wishes that the regulatory process could be quickened. "Diseases don't wait for FDA approval," he says. "As parents, we can only hope other kids can get the treatment they need soon enough."
Investors in stem-cell stocks, too, are impatient, and hope doctors can more quickly decipher the mysteries within the cells. The increased funding for stem-cell research should help speed the science. It should also create more investment opportunities in ancillary businesses that support scientific research and generate quantifiable measures of progress, like sales and profits, that Wall Street craves.
Investing in stem-cell researchers, however, is a far riskier game -- one best guided by hope, not expectations. Medicine does not march to a ticking clock, and miracles take time.
--------------------------------------------------------------------------------
Wealthy Individuals, States Fund What Bush Won't
THE RACE TO FIND CURES is one reason private money is flowing into stem-cell research. The Bush administration's restrictive public policy is another.
By blocking federal funding for embryonic-stem-cell research, the government has limited U.S. labs to using samples collected before an August 2001 cutoff date. These older cells are less effective and often improperly nourished with mouse cells and cow serum because they were stored before much was known about preservation. As a result, they risk developing animal diseases, scientists say.
To avoid falling behind China, Singapore and several European countries, California voted in 2004 to spend $3 billion on stem-cell research over the next 10 years. Several other states, including Connecticut, Maryland, Illinois and New Jersey, have also countered federal restrictions with smaller funding schemes of their own.
And when court battles held up California's planned issuance of bonds to finance its project, Gov. Arnold Schwarzenegger authorized a $150 million state loan so it could begin funding research without further delay. So far, its stem-cell governing body -- the California Institute for Regenerative Medicine, or CIRM -- has approved 119 grants totaling $158 million.
Research dollars could increase further as the political tide continues to shift. In the latest election, supporters of stem-cell research won 16 of the 19 congressional races in which the topic was flagged as a divisive issue.
The use of embryonic stem cells remains in a stalemate at the federal level. Both houses of Congress passed bills this year pushing for expanded stem-cell research. The Senate measure proposed, among other things, allowing researchers to use human embryos already slated for destruction at fertility clinics -- including thousands that have been frozen and stored and may never be used to impregnate patients. But President Bush is likely to veto the bills.
"Both sides get what they want for now," says Steve Brozak, president of brokerage WBB Securities and an unsuccessful candidate for Congress in New Jersey in 2004. The Democrats, he says, are seen as advocates of stem-cell research while President Bush gets to placate his conservative base by resisting embryonic-research efforts.
Sherry Lansing, who retired from running Paramount Pictures to run her own charity foundation, says "so much of this is about one thing -- letting scientists do their work."
Lansing was 40 when her mother died of ovarian cancer. "Today, more than 20 years later, the pain is still fresh in my mind," she tells Barron's. "But cancer is just a disease, and one day it'll be gone. And I believe stem cells is one of the paths that could lead to a cure in our lifetime."
Wall Street's private money has poured in. New York's billionaire mayor Michael Bloomberg gave $100 million to Johns Hopkins to fund stem-cell and biotech research. Eli Broad, founder of KB Home, gave $25 million to the University of Southern California for a stem-cell building. Ray Dolby, inventor of the Dolby sound system, handed $16 million to the University of California at San Francisco, while Bill Gates' charity gave $1.9 million to a Chinese university researching human embryonic stem cells.
"Our 18-year-old son is a test-tube baby, and we've been blessed by the research that allowed him to be conceived," says Bill Gross, who manages the world's biggest bond fund at Pimco. A $10 million gift to U.C. (Irvine), he hopes, will help "bring a sense of hope for many who would benefit from future stem-cell research." |
